"But in the unlikely story that is America, there has never been anything false about hope."
-Barack Obama

Thursday, May 29, 2014

Short Term Solutions

So it seems there are a lot of NOLA culture warriors who have discovered the existence of short term rentals, and point to this practice as if it were both new and one of the root causes of the housing affordability and scarcity problem in New Orleans.

For me, short term rentals can pose a very real problem in certain contexts, but there are pros and cons to the practice. In general, I find the cons arise as mainly as a symptom of a larger structural problem that isn’t nearly as sexy to talk about.

Property tax policy.

If you think you’ve heard tune before on Hurricane Radio, that’s because you have. All the talk of “gentrification,” “development,” “luxury apartments,” “blight,” and “short term rentals” can sound like a bunch of complex and intractable problems that have no solutions. It can make you want to throw up your hands (metaphorically or physically) in frustration. That’s something that happens when you focus on the symptoms of a larger problem – you’re trying to fix what’s broke without trying to break what doesn’t need fixing. Focus on the root concern, even with a little bit of non-expert attention, and you’d be surprised what solutions you start to see. That’s where empowerment comes from, because there is something tangible you can start to advocate for in making a change.

Taking current property tax policy into consideration (at least that which I can research online), here are some ideas I came up with that might mitigate the short term rental crisis through policy in less than 5 steps:

1. Have a high property tax rate, but allow the property owners to apply for itemized deductions.

2. Have a huge homestead exemption tied to a percentage of assessed property value as opposed to a set amount.

3. Generous (and possibly increasing) property tax deductions based on proof of long term renters, or low rent charged.

5. Proven violations of housing ordinances result in revocation of all deductions; finding of demolition by neglect allows assessment to look at property’s market value as if not neglected.

Done.

Now, I’m no expert on these matters, and some of these ideas may not be good ones. I’m not addressing how the assessor’s office comes up with property assessments, because I can’t seem to find that online. But some of these ideas may be workable. They sure help me think about short term rentals, land use, and gentrification in different ways. Lord knows, it sure beats complaining about how “hipsters” ruining New Orleans.

I could go into long-winded detail on almost all of them, but I'll focus this on how the Homestead Exemption (HE) is right now calibrated too low to help anyone with a house that's worth more than $100,000.

And you don’t have to take my word for it, you can go directly to the New Orleans Assessors’ Office to see how this works. Right now, here are the two basic property tax equations used to estimate your tax, as published on their website.

Do you see where the problem is here? The example uses a $100,000 home, and by that measure, the $7500 Homestead Exemption seems very reasonable. That’s because $7500 subtracted from $10,000 is a 75% discount. Looking at property value history of almost any property on Zillow, you can see how stable property values were right up until the flood. When this HE was adopted in the 80s (I think), it was probably very reasonable for most of the homes in NOLA.

But THESE days, median property values in NOLA are FAR higher than $100,000, especially for in-demand neighborhoods. What does that HE look like for a $300,000 home? Still $7500. But this time, subtracted from $30,000 assessed value. That’s only a 25% HE discount.

Again to our calculator, we find that if your home is now worth $300,000, you're paying $3425.85.

That may sound “progressive” from a taxation standpoint – the more your property is worth, the less percentage your discount is – but it isn’t calibrated to protect middle class and working class property owners who have seen their home values jump from $100K to $300K in the last decade without an associated increase in wages. In this way increasing home values added to inflation collude to increase tax liability on homeowners. This is especially true at the low end of the home ownership scale – as those properties have seen the biggest increase, percentage wise, in tax liability. In effect, those who already lived in the grand dames of New Orleans homes haven’t had a tremendous increase as percentage, because that $7500 discount already didn’t mean much to their property tax liability.* But folks who bought or moved or lived here 15 or more years ago because regular home values and rents were affordable have been the hardest hit with these increases. Heaven help those folks who are on a fixed income.

And as with all things, if you’re renting at an affordable rate 10-15 or even 5 years ago, and the value of that property goes up and increases your landlord’s property tax liability, they’ve got to raise your rent. It doesn’t matter that neither you nor your landlord’s other wages have increased. They’re paying more so you’re paying more, and if you can’t afford it you have to find somewhere else to stay. If they can’t afford it, they’ve got to sell or renovate the property as a new luxury apartment.

Wait.

I thought we were just talking about short term rentals, not why people are getting priced out of the places they’ve lived for 20 years? Isn’t that more the gentrification issue? Exactly – when the root cause of these issues is founded in the same policy, addressing the root policy will address multiple issues.

Short term rentals are in demand because NOLA is such a destination. Property owners facing these high percentage property tax increases in recent years have to make money on their property or sell. Here' we're not really talking about HE anymore, we're talking about rents going up and up and up while affordable housing options become scarce.

With short term rentals, they stand to make more money on their now high-tax-liability investment by competing directly with the overpriced hotels and legal B&B’s. While it is risky, a potential return of $2000 for a week is far greater than long term renting at $1400 a month. You only have to STR 8 weeks a year to make as much as you would with one long term renter at those prices, which means that you’ve got 44 more weeks of the year to simply put money in your pocket. That’s a CRAZY market incentive, and one reason you see people coming to NOLA, buying $300K homes in cash, and just leaving them on the STR market year round. It is one of the best investments anyone can make anywhere under the current land use policies in NOLA.

The fact that the city government actually benefits more from that arrangement, both in terms of property taxes collected and tourist money spent on something other than hotel rooms (where most of the money goes to the state), and ALL your market and government incentives are set up to promote the current state of affairs. Of course the city isn't interested in cracking down. If you want to change that state of affairs, you’ve got to address how property taxes are handled in this city.

*If my math is right (and it may not be), HE on a $750,000 property is a 10% discount, while a HE on a $900,000 property is just over a 9% discount. While that could translate to a few thousand dollars, that’s barely a 1% difference, and the demographic that owns homes at that price is the one best able to handle such an increase.

On the other hand, If your home went from $100,000 to $300,000, you’re HE discount on property tax has completely inverted from 75% of assessed value to 25%, and that's happened to the population least likely to be able to pay for that increase.